Roth Conversions
 

Can anyone recommend someone like a tax pro who would help me determine the tax consequences of, and recommended amount to convert from a conventional IRA to a Roth IRA?

Have you used anyone in the past???
It's not easy to ramp someone up quickly, without offering generic suggestions.
TOOOOOO many CPA's, Tax Advisors, Financial Peeps, give you the latest text book suggestions.
TOOOOOO many said, conversion.

Conversions ain't that good.
IF good, marginally good.
IS it really worth it...............will never know until U R dead.

Good Luck.

Hopefully your financial advisor has a tax professional associate. There are many things to consider aside from just the tax issues. for example there may be a 5 year waiting period before you can withdrawal the ROTH funds. I had looked into this years ago, but I missed the optimal time to do the conversion, so I just live with RMDs.

OP, the problem with Roth conversions is that you need someone with a crystal ball to tell you future tax rates for you and your heirs, future retirement laws, and how long you will live. Good luck finding a tax pro who can do this.

Single or Married makes a huge difference.
Max Social Security AND pension?
How big is your NON qualified, taxable investment account?

Basically, there is a balance between three Investment account buckets:
IRA/401K
Taxable Investments
Roth IRA

There is a balance between three income sources
Social Security
IRA RMDS
Pensions

and the the more controllable bucket but also can be very lumpy and very hard to predict, is your total living expenses combined with your age and health conditions, now and in the future.

Also, delaying Social Security will help with the conversion and can even be used while delaying social security. The question is: will you be using the Roth to NOT WITHDRAW from your taxable account? or to use if you don't have a significant taxable investment account to withdraw when SS and Pensions/interst and dividends are not enough? if uncertain, please review the size of your three investment account balances above.

for most people, you do not need more than 200K in a Roth right now, age late 60s when the optimal time is to convert when not working. Converting $200K all at once is a very big tax check, so equal amounts over the pre IRA RMD years will be the best, depending upon circumstances.

And as an anon poster, I have 30 + years in corporate finance building forecast models for all kinds of financial scenarios, and if you want to discuss further, please send me a private email, and I can get you started in the concepts so that you can discuss a plan with any CFP and CPA.

Finally, a CPA focuses on tax reduction strategies, and a CFP focuses on wealth management, investment increases which are two opposite points of view, complementary, but be sure that you understand where each strength lies and what to expect their contribution would be.

We have had historic low tax rates for a long time. What are the chances that they will stay low for a long time? Whenever you have a taxable account remember you have an uncle waiting for his share. There are many MANY questions to be answered. Married, kids, charities, health, age? A good resource is Ed Slott, he is a tax/Roth expert.
In my situation, we are doing Roth conversion while tax rates are still low (until 2026).

I started a thread a week or so ago asking for opinions as to the wisdom of Roth conversions. Of course, responses were all over the lot. I came to the conclusion that the only way to figure it out was to look at my particular scenario, and what my concerns were. Here's what I came up with:

My situation is that nearly ALL of the money we (wife and I) have, that we are counting on to last until we die, is in regular IRAs. From all of the calculators I've run, plugging in various unknowns like rate of return, inflation, expenses, etc. it should suffice nicely at a very conservative 4% rate of withdrawal, and even survive the RMDs. BTW, I am 71, and my wife is 66.

If we die in our 80s, no problem either way. I can convert, or not. Where it could get dicey is if we live well into our 90s...or even more dicey, and more likely, is if ONE of us lives into our 90s (we both have relatives who have died young, and some who have lived well into their 90s, even to 100). So the conclusion I have reached is that for us, it's worth doing.

As a wise old relative once said to me, "don't worry about dying. Dying will take care of itself. Living is what you have to worry about". So in that vein, if one of us survives the other for a long time, without converting to Roth, RMDs would push the survivor's income beyond what would be needed, and while I don't have a crystal ball to tell me exactly what the tax rates will be 20 years from now, I feel confident that a single person, filing singly, will be in a higher rate then, than a married couple, filing jointly, will be in now.

I created a bunch of spreadsheets trying to figure out what would happen to the IRAs with no conversions, and what would happen to the combination of regular IRAs and Roth IRAs if I converted various amounts.

For me, for us, DW and I have decided we will convert some. I made a list of some "threshold" numbers, particularly where the marginal tax rates (Married Filing Jointly) change, and also where the IRRMA thresholds are. I used those thresholds to help me decide at what levels I wanted to be at with our taxable income and our MAGI (IRRMAs are figured based on MAGI, not taxable income, be sure you know the difference).

I am currently in the boat of having decided for myself what I want to do, and will be looking for a tax advisor to make sure I pay my estimated taxes correctly, and use the proper tax forms to avoid a tax penalty. I am not going to ask a CPA or CFP if I should convert. I did that homework myself, based upon sacrifices I am willing to make now, in order to avoid a scenario I am concerned about that I may never even live to see the benefit of. That's OK with me. I've made my own decision on what I want to do, I need to make sure I do it properly so I don't incur more expense than I'd calculated, by doing it improperly.

I have both a Roth IRA and a non-Roth 401K. I am not planning to covert my 401K since I like the national ERISA protections.

It is not complicated. The amount you move into the Roth IRA is added to your annual taxable income. You alone can determine what tax burden you can tolerate.

Managing the estimated tax due is a bit complicated. I feel it's to my advantage to make the conversion in December, so I can keep the money I will use to pay the taxes in my possession as long as possible. There are some forms you have to fill out, and fill out correctly, in order to avoid the penalty consequences of not having made the estimated tax payments quarterly, as you would if your income was steady throughout the year.

From what I can glean reading the IRS instructions, you can pay your estimated taxes as you receive the income, but you have to report it a certain way. I think I understand it, but I'm not sure I understand it. Especially for the first year doing this, I think having a tax pro guide me through it might be money well spent.

Also, it's not just about how it affects your taxable income, you have to be aware of how it affects your IRRMA thresholds.

I use the prior year tax rule to pay an equal amount of estimated tax every quarter. It makes no difference when I receive income during the year. There is no penalty due. And, the income tax due on any IRA withdrawals or conversions are always due on April 15 of the next year, regardless of when you received the income. So, you can receive the income in January or December of the prior year, but the same tax amount is due on April 15 of the next year.

Yes, if you don't use the prior year tax rule, you could owe a small penalty if you don't adjust the estimated quarterly payments.

I appreciate that information. I would love to be able to find it on the IRA.gov site. If you happen to have a link to the publication that explains that, I'd appreciate it. I'll keep searching.
Thanks.

I don't have a specific link, but I always pay my annual income tax on April 15 for the prior year. I never have any money withheld during the year for my pension, dividends, or RMDs. All of my taxes are paid quarterly as estimated payments. As I understand it, as long as you follow the prior tax year rule, which is usually based on 25 percent per quarter of the total tax paid in the prior year, you will never owe a penalty, even if your income greatly exceeds the prior year income. Recently, I took my RMD and paid no withholding tax on it. There are some sources of income that may require a tax withholding, such as a gambling or lottery winning, but money withdrawn from a tax deferred account for an RMD, pension income, or SS income are not subject to mandatory withholding. So, compliance with the IRS estimated tax rule will avoid a penalty, and allow you to pay any additional taxes due on April 15. I use TurboTax and they calculate my estimated payments for the next year as well as my taxes due for the current year. These estimated payments are due on April 15, June 15, September 15, and January 15, and they must be paid on time. I don't know if there is a special rule for a Roth conversion, but I doubt it.

Note that I did some Googling, and it looks like a Roth conversion just adds ordinary income to the current year's taxable income, with no requirement to pay the tax earlier than the normal April 15 tax date. Fidelity says:

Time of year
Converting earlier in the year gives you more time to pay taxes, but converting later in the year allows you to start the 5-year rule as of the beginning of the year.

OK, I was misunderstanding what you said.
thanks.

While I agree with all the above (and it took me a while to get to that place) I'm not yet sure whether you need to pay estimated taxes based on 100% of your payment for last year or if you need to base it on 110% when your AGI is above a certain level. I use 110% just to be safe but that *might* not be necessary.

That is why I said "usually". If your AGI is above a certain level, you do need to pay 110 percent of your prior year tax. But, if you use a tax software, like TurboTax, the program will calculate the correct amount for you. One year, this happened to me and I thought TurboTax had made a mistake. If you are under the AGI limit, I would not pay the extra amount in estimated tax. Let the tax software tell you how much to pay.

The other method, which I never use, is to pay at least 90 percent of the current year taxes due. This involves a complicated calculation and tracking of your income during the year. It's not worth it to me.

Also, if tax withholding is optional, I never allow someone else to deduct taxes from my income.

I haven't found (or looked for) that estimation option in the HR Block software. I should look.

The year I retired I chose not to use the 110% method - my income decreased significantly and I wasn't willing to give the IRS that much extra. I built a spreadsheet to perform the 90% calculation to a usable degree. It wasn't perfect but it kept me away from a penalty. You're right though, it is a fairly complicated calculation, requires a lot of input, and needs to be updated each year. Now that my expected income has leveled out, the 100%/110% method is preferable.

Of course, you could always mitigate the fiduciary and tax aspects by using a fee only advisor who is also a CPA. I know of one, but you'd have to be comfortable with her not being local: Annette Di Bello CPA CFP(R) PC Fee Only Fiduciary Wealth Mgmt

Agreed - but if you have made tax estimates based upon a reduced income in the next year and did use not the safe estimates equal to last year taxes (possibly plus 10% if you're in a higher bracket) and then you got a large income in the last quarter form 2210 is what is used to avoid a penalty if you make an larger tax payment in January.

Out of any Roth IRA withdrawals are made in the following order: original Roth Contributions, Roth conversion contributions and lastly earnings. It is the earnings which are subject to the penalties, not the withdrawal of contributions. That means that at least 5 years must elapse between the the tax year of your first contribution to a Roth and withdrawals of earnings. Once the 5 year rule has been met and the account owner is 59 1/2 or older they may make a qualified distribution exempt from taxes and penalties.

So many factors to determine in making this decision - age of the client, health of the client, taxable income/tax bracket now, investment goals, tax brackets in the future, etc,

Looks like she has an AUM fee structure. From her website:

Investment Management Fees - $1,000,000 minimum investment
1.20% annual on the first $1,000,000
1.00% annual on the next $500,000
0.80% annual on the assets above $1,500,000

That's a little pricey IMHO..

Her financial planning fee seems reasonable except that one must first be an AUM customer to obtain that service for which one is already paying a huge percentage of invested assets under her management every quarter.

From her website:

Financial Planning Fees
Comprehensive Tax, Financial & Retirement Plans Start at: $2,500 - $400 per hour

Also while I commend her for going to night school at Cal State Fullerton to obtain her bachelor's degree in business administration it is not a top business school.

I may have missed it but I did not see any statement on her website about her acting in a fiduciary capacity.

I'll pass...

My advice about Roth conversions is to don't do it. Keep the money in a Traditional IRA. If you have a 401K, roll it over into a Traditional IRA. If you ever go into assisted living or a nursing home, pay for it by withdrawing money from the Traditional IRA and take a medical tax deduction. I think the Government created the Roth conversion so people would pay their taxes early.

My advice is don't follow that advice. Everyone's situation is different and asking for advice without knowing all the info is the same as asking a crowd what is the best food to eat. Tons of answers with only a few actually helpful answers.

After watching my father pass and my mother's taxes exploding as a now-single taxpayer, having some money one can use without tax consideration is beneficial. Just another opinion.....

Bernie Madoff was a fiduciary. How did that work out?:angel:

There are several variables to consider:

First, what is your reason for creating a Roth?
* Reduce potential RMD?
* Reduce income taxes to heirs?
* Reduce future income taxes?
* Single or married makes a big difference. .

These strategies are straight up tax minimization strategies, and as the IRA gets larger:
* there is a level below which a Roth won't make much of a difference
* there is a level which a Roth can be very beneficial
* there is a level above which a Roth isn't worth the taxes paid.

The biggest determinate are:
* size of your taxable investment account
* size of your annual living expenses

Spending above your Social Security and pension totals have to be funded from somewhere. Typical example: If you live with no savings after SS and pension totals, how will you pay for a new car or a new roof to keep insurance?

* more IRA?
* some taxable investments?
* some ROTH?

That's how to think about a ROTH vs taxable investments vs IRA
and yes, you may have to pay some taxes on the investment account but taxes are a measure of success, the more successful, the more taxes. . and if you fear paying more taxes, you will seldom build substantial wealth. AND there are investment tax minimization strategies for taxable accounts.

YMMV:)

The only surefire example I have seen where a Roth conversion made sense was a retired teacher I knew who had a plan to convert all of his retirement money into a Roth, so he could leave tax free money to his children. He knew he was paying more taxes than he needed to, but he didn't care.

Every other example of a Roth conversion required the use of a crystal ball to predict future tax rates for you and your heirs, future incomes, life spans, and other unknowable variables.

Tom, I would like someone on this site to actually answer the original question, just once and not spout their opinions.

I have been using Boldin (formerly NewRetirement) software to model retirement… cost is about $95 a year. I’ve modeled conversions to highest tax bracket, conversions to 22-24% bracket, no conversions, dying at 85/95, one spouse before the other and what I found is, one, we’re not going to outlive out savings, and two the money left when we both die is approximately the same with our without conversions… BUT… with conversions, our daughter and potentially grandkids will have a whole bunch of money that is tax free. No conversions leaves a bit more money than massive conversions (approx $1-2M more), partial conversions is a break even but a huge conversion leaves many more millions that are tax free.

If you come across someone here in TV that could help with this, please message me.

thanks in advance…

We used Craig Wear to determine whether a ROTH conversion made sense for us.

His firm is not an investment advisor, and he does not work on a commission. He does not recommend specific investments either.

He has written a book that is available at Amazon. It tells you a lot about the conversion process. For some people it makes no sense. For others like us, it made a lot of sense.

We are in year four of the process after 3 years of large conversions.

Wife and I both had large 401Ks that we first rolled over into conventional IRAs when we retired at 65.

We deferred our SS to gain that 8% return each year until we turned 70 last year. We had other taxable income from deferred compensation and taxable investment accounts that provided bulk of our income until we started SS.

We paid for a plan for ROTH conversions, and began conversion 4 years ago. It put us into a higher tax bracket, and we paid estimated taxes each year. We hit IRMAA, too, but wife had a retirement benefit that took care of that surprise.

Craig Wear developed a conversion plan for us that made sense. It worked for us.

Read his book as he fully describes the process, the planning, and it tells you whether it makes sense for your situation.

As for future taxes...who knows. I do know that the ROTH balances for us will NOT be taxed. Everything else will be.

Saving Taxes for a Lifetime | Q3 Advisors

I have been converting my IRA's to Roth for years. I am 73 now and this is my final year to be able to do this. Makes sense to do this as now the Roth IRA's will grow totally tax free with no burden on those that will inherit.

Very important, as heirs will be under pressure to withdraw funds within 10 years, and pay any taxes due.

No time limit or restrictions on ROTH inheritance, and no taxes due.

Tax-free from a fund that took a 22% reduction in 2024
OR
Pay 22% tax from a fund that was not reduced in 2024

The simple math says that is a wash.
The more complicated math considers RMDs and their effect on SS taxes and Medicare fees
The WAG comes with factoring in future gains, future changes in ROTH rules, future tax tables, and the tax status of heirs during the time they are required to make withdrawals.

IMO, a lot of information, some good, some not accurate. It doesn’t matter how much you have in taxable accounts, in Roth accounts, in pensions, if you want to save money on future taxes, then all you have to do is determine if cashing out of your ira/401 is beneficial or is it more beneficial to just take RMDs and pay taxes at that point. Also, there is no optimal Roth amount to have, if you have millions in your ira/401ks, then if you were going to do a conversion, then I would convert all of that money now or over time, I wouldn’t stop at 200k.
IMO, you missed out on the optimal time to convert to a Roth, you should have done it in 2020 when everything was down 30+% or more. Now, if your investments are at their peak, it’s the worst time to convert. In 2020, you would have sold all your Ira’s/401ks and paid much less in taxes because your gains would be at their lowest level, then you would have taken this Roth money and rebuy all investments you had before the conversion and then when the “v” shape recovery occurred, you would have recovered very nicely. Now, you will be paying much more taxes since your gains are at their highest and since the market is high, you won’t have the same environment to reinvest your new Roth money to make gains to recover your losses in your conversion, and in todays environment, there is just as much of a chance the market will go lower, which will be a double hit against you.
Also remember, if you open an Roth IRA today, you have the 5 year waiting period.
Any money made during your conversion, goes against your Medicare income and you will be paying much higher Medicare premiums for 2 years. Also, if your spouse happens to be on affordable care act and is subsidized, you will be paying some or all of that subsidize back.

What’s really bad doing a conversion is that you reduce the amount of money in your portfolio to make money in the future.

It doesn’t matter how much you have in your taxable accounts if your goal is to save money on Roth conversions. What matters is how much are your capital gains, dividend income you are getting on your taxable accounts that you are getting taxed on now.
For social security, there are many reasons to consider taking social security now or waiting until you’re 70. If you have to sell investments every month to live on, then taking social security now might make more sense, mainly because you will be in situations that you are selling when your investments are losing money so you have to sell more shares to meet your living needs, and this situation causes you to lose your ability to take advantage of the gains when the market recovers because you sold off more shares. I made buckets to put my money in. While I retired early, I had a bucket of money that I could live on for 2 years without selling any shares, invest this money in money market where they are treated as cash. That bucket got replenished with my taxable account dividends.

To answer your question about your personal tax consequences, a qualified tax preparer is certainly the best kind of professional to answer your question. CPA tax preparers are a good place to start your search as they know taxes. Your personal issue you described is not very unique. I suggest you search for a CPA tax preparer. Lots of them around. And you don’t _need_ a local professional. If you know one from wherever you came from, that could work.

You do not need a financial planner to answer the question that you asked. Some planners are good at technical taxation but I believe (from experience) most are not.

Unfortunately for you, most good tax professionals don’t want a one-off client for only 2-3 hours of work that you seem to want. They are too busy for small jobs like you ask. But you would more likely be accepted by a qualified tax preparer like a CPA as a client if you commit to become an annual tax client for your form 1040 returns.

Good luck.

Once you reach the point of RMD with traditional IRAs, conversion does not make a lot of personal sense. However, it does reduce the tax burden on your heirs. I look to do some conversion each year, depending on my tax situation that year, being careful it doesn't push me up another bracket.

Convert $$ up to 94K in adjusted(after deductions) gross income will keep you in the 12% bracket(married filing jointly). over that goes to 22%. That is what I do.

I agree with this.......................it doesn't matter much.

A lot of "professional fees" being generated.

:wave:

Currently, there are no taxes on Roth IRAs, and there is no inheritors’ income taxes. The same can be typed for taxable accounts on the inheritance income and for the inheritance estate with the markup at death. The only taxable part of a taxable account is some cap gains occasionally and income on dividends if the agi/ dividends are high enough throughout the life of the owner

I would add that the same tax free treatment does not apply to an inherited Traditional IRA, if the money was initially deposited as a tax deduction. Also, there are complicated IRS rules for when the heirs must withdraw the money and pay the income tax.

I am not a tax pro. First thing to realize is you pay your top tax rate on every dollar you convert to a ROTH. If, you are now dealing with RMD, required minimum withdrawals, you also pay your top tax rate on those. Assuming the money was in the stock market there are no long term capital gains. The TAXMAN has been drooling over YOUR MONEY all these years.

INVESTIGATE before doing it. You can give RMD to a 5013C charity and then you pay not tax on it. Needs to be done right. Your brokerage can guide you. Beware, I was told you can take the money and then give it to a charity. THAT IS WRONG. You touch the money and the TAXMAN will demand his cut of YOUR MONEY.

I have an inherited IRA from my mother. It is not much but it is a gift that keeps on giving. I don't believe it is still an option. You are forced to withdraw every year from the time you get it.
Someone once told me the amount you are FORCED to withdraw forces you to reduce it to zero by the time you reach 100. Mine is in the market and is growing after my FORCED withdrawal.
MATH? How far past 100 will the IRS allow me to live?